The mid-market rate, and why nobody gives it to you

What the mid-market rate actually is

Currencies are traded between banks in a wholesale market where, at any moment, there is a price to buy a currency and a slightly higher price to sell it. The mid-market rate, also called the interbank rate, is the midpoint between those two prices. It belongs to nobody and contains nobody's profit, which is precisely what makes it the standard reference figure.

This is the rate quoted on news sites, in search results and on this site. It answers the question of what a currency is worth. It does not answer the question of what you will be charged. Those are different questions, and confusing them is the most common mistake people make with exchange rates.

Where the difference between that rate and your rate goes

A bank, a card scheme, a bureau or a transfer service does not sell you the mid-market rate. It starts from a wholesale rate, moves it in its own favour, and quotes you the result. That gap is the spread, and on most retail currency transactions it is the provider's main source of revenue, usually larger than any fee shown separately on the receipt.

The spread covers a mix of real costs and pure margin.

• The bid-ask spread the provider itself pays when it trades in the wholesale market.
• The risk of holding a currency between the moment it quotes you a rate and the moment the trade settles.
• Handling costs: correspondent banks, card scheme fees, moving and insuring banknotes, counter and airport rent.
• Profit, which is the component that varies most between providers and explains most of the difference you see.

Why every provider quotes a different rate

Two providers can start from an almost identical wholesale rate and still show you figures several percent apart. They price differently, and they price at different moments.

• Different margins per product. A card purchase, a cash withdrawal, a bank transfer and banknotes over a counter are priced separately, often within the same institution.
• Different snapshots. Some providers fix a rate once a day and hold it; others refresh continuously.
• Different fee structures. A flat fee, a percentage, or a charge folded entirely into the rate. A sign reading no commission usually means the margin is in the rate.
• Different amounts. Many providers price large transfers closer to mid-market than small ones.
• Different currencies. A thinly traded currency carries a wider spread than the euro or the dollar, whoever is quoting it.

How to work out the margin you actually paid

You do not need a provider to disclose its margin, because the transaction reveals it. Divide what you received by what you gave up. That is your effective rate, fees included. Compare it with the mid-market rate at the time, and the difference expressed as a percentage is what the exchange cost you.

With round numbers: you hand over 500 units of your own currency and receive 430 units of another, so your effective rate is 0.86. If the mid-market rate that day was 0.90, the exchange cost you about 4.4 percent, whatever the receipt said about commission.

Why a small-looking margin is not small

A margin is taken on the whole amount rather than as a flat charge, so it scales with what you convert. Two percent reads as an unremarkable number and behaves as a material cost: on a month's rent paid abroad, on a car, on a tuition instalment, it is a real sum for a transaction that took the same two minutes either way.

It is also why the cheapest provider changes with the size of the transfer. On small everyday amounts a fixed fee dominates and a slightly worse rate barely registers. On large ones the rate is almost the entire cost and the fixed fee is a rounding error. Compare the two components separately rather than looking for a single best provider.

• Small amounts: look at the fixed fee first.
• Large amounts: look at the rate first, because the margin scales and the fee does not.
• Recurring transfers: compare on the annual total rather than on one payment.

When the mid-market rate is the right number to use

Use it as a benchmark and a sanity check: to know roughly what something abroad costs, to compare two offers on the same footing, to judge whether a quoted rate is reasonable, and to value a foreign figure in a budget or a report. It is the number to compare against, not the number to expect.

All Currency Converter shows mid-market rates from ExchangeRate-API, refreshed hourly, on the web and in the Android app. They are indicative reference figures rather than a quote, because the price of an actual transaction is set by whoever executes it.

For anything large, such as a property payment, a salary transfer or an invoice in another currency, ask for the total in your own currency before you commit and work the rate back out of it. A provider unwilling to give you that figure has told you something about its margin.